Possible Financing Schemes for Current and Near Term Nuclear Power Projects Workshop on Technology Assessment of Small and Medium-sized Reactors for Near Term Deployment Headquarters, Vienna, Austria, 8 December 2011 Nadira Barkatullah Department of Nuclear Energy, Planning and Economic Studies Section International Atomic Energy Agency
Key Media News on Nuclear Economics Nuclear Costs to Rise Following Fukushima Disaster (Energy Business Daily, April 25th, 2011) Economics, not public sentiment drives nuclear financing (Nucleonics Week 23 June 2011) The economics of nuclear power may deteriorate in comparison with other generating technologies in the wake of the Fukushima accident (OECD International Energy Agency, 2011 World Energy Outlook) Eurozone: Sovereign Debt Becomes a Credit Crunch (Forbes 25 November, 2011) U.A.E. s Nuclear Power Program said to cost $30 Billion (Bloomberg Business week, 28 November, 2011) Concerns Persist Over Economic Impact of Bank Liquidity Contagion Risks in Europe (S&P Capital IQ Lookout Report, December 2011) 2
GWe Nuclear Power Current Status On 6 December 2011, 434 nuclear power plants (NPPs) operated in 30 countries worldwide, with a total installed capacity of 368 GWe 400 350 300 250 64 NPPs under construction 200 150 100 50 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Overview What is Special in Financing of Nuclear Power Projects Sources and Types of Financing Existing and Emerging Financing Schemes and possible trend Contractual and Ownership Arrangements Concluding Comments 4
What is Special in Financing of NPP Projects The Economics of Nuclear Key Advantages of the Nuclear Power Relatively low fuel cost: economic competiveness Price stability Current fleet performance of nuclear reactors Long life time Guarantee for energy supply Clean source of energy Economic development: job creation and contribution to national high technologies sector Key Challenges to the Nuclear Power Complex and highly capital intensive: high upfront capital costs, which are difficult to finance Sensitive to interest rates Long lead times (planning, construction, etc) Long payback periods Construction cost uncertainty and completion risk Regulatory/policy risks (revised safety measures) New financing structures required to attract private investors 5 5
What is Special in Financing of NPP Projects Key Challenges to the Nuclear Power The Economics of Nuclear Complex and highly capital intensive: high upfront capital costs Sensitive to interest rates Long lead times (planning, construction, etc) and Long payback periods Might be less challenging for SMRs Completion risk Cost uncertainty Other Financial Risks Regulatory/policy risks (revised safety measures) New financing structures required to attract private investors Challenging for all types of reactors - SMRs and Large Reactors (LR) 6 6
NPPs overnight capital cost uncertainty Source: OECD: Current Status, Technical Feasibility and Economics of Small Medium Reactors. June 2011 7
NPPs overnight capital cost uncertainty Economies of scale challenge Source: OECD: Current Status, technical Feasibility and Economics of Small Medium Reactors, June 2011 8
Overnight costs ($/kw) NPPs overnight capital cost uncertainty 7000 6000 28 46 5000 4000 3000 2000 36 For SMR the cost might be lower (less than billion) but $/kwe might be the same or higher 1000 0 North America Europe Asia : Data collected from various publications and studies to keep track of nuclear power plants investment costs, since 2008 (updated Nov 2011) All data in 2008 USD 9
Construction Duration Construction and IDC Construction duration of SMR could be shorter compared to LR resulting in lower IDC % of overnight capital cost 10 8 6 4-20 40 60 80 Interest Share (5%) Interest Share (10%) Modular reactors may reduce risk associated with construction
Business risk Main Financial Risks So what are the main financial risks associated with an investment? Sales or Revenue risk Operating risk Financial risks Credit risk (sovereign and corporate) Market risk (currency, fixed-income, equity and commodities)
Default Speculative Grade Investment Grade Major Financial risks: Credit Risk Fitch Standard & Poors Moody's AAA AAA Aaa AA+ AA+ Aa1 AA AA Aa2 AA- AA- Aa3 A+ A+ A1 A A A2 A- A- A3 BBB+ BBB+ Baa1 BBB BBB Baa2 BBB- BBB- Baa3 BB+ BB+ Ba1 BB BB Ba2 BB- BB- Ba3 B+ B+ B1 B B B2 B- B- B3 CCC+ Caa1 CCC CCC Caa2 CCC- Caa3 CC CC Ca C C C D D C Easier to borrow: lower interest rate Tough to borrow: higher interest rates
Foreign exchange risk What is foreign exchange rate risk? The risk of an investment's value changing due to adverse movement in the currency exchange rates Import NPP equipment value 1.5m MXN at USD/MXN=15 Financial crisis Import NPP equipment value 1m MXN at USD/MXN=10 Source: Yahoo Finance December 2011
Major Financial risks: Market risks Commodity prices: Power Plant Construction Cost Index (PCCI) Power plant construction cost pressure returning (July 2011) Oct 2008 Financial Crisis Metals Index Industrial Input Average Petroleum Spot Index Source: IMF (April 2011)
Factors that Influence Financing NPPs Enhancement of safety and impact on investment cost Increased regulatory risk and uncertainty in the regulatory process Negative public perception of nuclear Multinational Banks policy on credit availability Construction Supply Chain risks Deregulated electricity market rules and regulation Operational performance risk Nuclear liability and insurance on how to cap and allocate the extraordinary nuclear occurrences Management of spent fuel and waste, and decommissioning 15
What is appropriate financing model Financing and cost of finance What are the sources and types of finance? What are the different financing models employed in the nuclear industry?
Financing So what is Financing? Providing necessary capital through issuance and sale of debt and/or equity Debt Financing Equity Financing Local banks international financial institutions export credit agencies Suppliers Local and foreign investors Shareholder Capital markets: like IPO international development organizations Capital markets Cost of debt: Interest paid Cost of capital: return on capital
Financing: Cost of finance In simple case weighted average cost of capital (WACC) is:* WACC = Debt Debt +Equity Rd + Equity Debt +Equity Re Where: Rd is the cost of debt Re is the cost of equity Generally, for nuclear the cost of finance is higher with risk premium of x% above other power generation assets added to the interest rate * Without any tax adjustment
Types of Financing Government State Budget (like, tax revenue) Equity ownership Government incentives (like, loan guarantee, construction delay insurance, guaranteed long term power purchases agreements) Export credit Long-term Infrastructure bonds issuance 19
Government Financing Traditional Government financing: take all risks and costs Utilities (Generators) borrow on balance sheet Who finally pays for all the costs? Essentially 100% risk on the customer: All costs: construction and operations passed on to the customer!
Government Financing Traditional Methods of Financing Multilaterals Government Budget Official Borrowing Commercial Banks Export Credit Agency Public Utility Nuclear Power Project 21
Nuclear: Traditional Financing Model Export Credit Agency (trade finance): Provides financing services such as guarantees, loans and insurance to domestic companies for their activities in order to promote exports in the domestic country: ECA Credit Insurance Commercial Banks Credit Repayment Customer How does it works? Foreign Buyer Exporter Payment on Delivery Letter of Undertaking Lending Bank Cover ECA
Types of Financing Governments seeks private sector participation Industry financing Corporate finance or balance sheet finance Project Finance (non or limited recourse): Long term finance based on the projected cash flow of the project (In nuclear pure project finance is still not applied but some combination of corporate finance and project finance hybrid finance Co-operative finance or hybrid financing Innovative financing methods 23
Industry Financing Corporate finance or balance sheet finance: borrowing or raising equity against the assets of the company as a whole. A bank or bond holder which provides funds to the company has a claim against the company s whole cashflows, unless the loan is secured against a particular asset, as is common for mortgages. Risk of that investment is borne by all providers of capital to that company Example EDF, Enel, RWE, E.On GDF SUEZ.. Applicable for SMR 24 24
Industry Financing: New trends emerging Co-operative model or hybrid financing :Olkiluoto 3 or Finnish Model: Expanding equity partners to diversity risk Debt Financing 75% TVO 25% Equity Debt holders: Market rate Shareholders: Equity injection shareholder loan no dividends 6 Shareholders Power use in own operation Other power off-takers (about 60) Power use in own operation External Market Characteristics of hybrid financing (corporate/project finance): The project financed on the balance sheet of TVO (Finland Private Power Company) Part of equity and loan is provided by the large customers A long-term PPA with large customers ensuring future stable revenue stream from the project Leverage characteristics similar to project finance Export credit guarantee by the French and Swedish Government
Industry Financing: New trends emerging Project Finance: Some trend emerging as new partnerships are formed to diversity risk 26
Industry Financing: New trends emerging Equity Investment by vendors: the new market trend? the extend of investment will depend on the structure of project Partnerships: Partnership between Babcock & Wilcox and Bechtel - has signed a letter of intent with the Tennessee Valley Authority (TVA) which defines the project plans for constructing up to six small modular reactors 27
Risk transferability from public to private Financing trends emerging Combination of models emerging and likely to be widely used Project Finance Combination of models proposed and already in use Co-operative Models Combination of models widely used Corporate Finance Government Financing Ownership transferability from public to private
Contractual Arrangements Basically there are the following main types of contractual approach that have been applied for NPP projects: Turnkey contract: a single contractor or a consortium of contractors takes the technical responsibility for the whole NPP project. Split-package: the overall responsibility is divided between a relatively small number of contractors, each building a large section of the work. Multi-contract: the owner or its architect-engineer assumes overall responsibility for engineering and managing the NPP project, issuing a large number of contracts. 29
Ownership and Contractual Arrangements Public Private Partnership Options Broad Category Main variants Ownership of capital assets Responsibility of investments Assumption of risk Duration of contract (years) Supply and Management Contracts Operational/ Maintenance Management Public Public (O) Public/Private (M) Public (O) Public/Private (M) 1-5 Lease Lease Public Public Public/Private 3-20 Concession** BOT* Public/Private Public/Private Public/Private 15-30 Private Ownership of Assets BOO Private Private Private Indefinite Build-Operate-Transfer (BOT) has many other variants such as Build-Transfer-operate (BTO), Build-Own-Operate-Transfer (BOOT) and Build-Rehabilitate-Operate-Transfer (BROT). **Franchise contracts are also a type of concession arrangements with 3-7 years of durations.
Type Ownership and Contractual Arrangements Built Own Operate and Transfer Explanation Build-operate-and-transfer (BOT) Build-own-and-operate (BOO) Build-and-transfer Build-lease-and-transfer A contractual arrangement whereby the project company undertakes the construction, including financing, of a given infrastructure facility, the operation maintenance thereof. The project company: - operates the facility over a fixed term - charge facility users (customers) appropriate tolls, fees, rentals, etc - the charges do not exceeding those proposed in its bid or as negotiated - to recover its investment, and operating and maintenance expenses - at the end of the fixed term, transfers the facility to the government A contractual arrangement whereby a project company is authorized to finance, construct, own, operate and maintain an infrastructure. The project company: - allowed to recover its total investment, operating and maintenance costs plus a reasonable return thereon by collecting tolls, fees, rentals or other charges from facility users. A contractual arrangement whereby the project company undertakes the financing and construction of a given infrastructure. The project company: - upon completion turns the asset to the government - Government pays the company on an agreed schedule its total investments expended on the project, plus a reasonable rate of return A contractual arrangement whereby a project company is authorized to finance and construct an infrastructure. The project company: - upon its completion turns the asset over to the government concerned on a lease arrangement for a fixed period after which ownership of the facility is automatically transferred to the government Build-transfer-and-operate A contractual arrangement whereby the public sector contracts out the building of an infrastructure facility to a private entity such that the contractor builds the facility on a turn-key basis, assuming: - cost overrun, delay and specified performance risks - once the facility is commissioned satisfactorily, title is transferred to the implementing agency/lgu - The private entity, however, operates the facility on behalf of the implementing agency/lgu under an agreement.
Contractual/Ownership Arrangements: New trends emerging For a first time a build-own-operate (BOO) contact, where Rosatom will BOO the VVER nuclear units at Akkuyu, in Turkey Project company legal entity incorporated in Turkey Founders:5 Russian government companies affiliated with Rosatom Russian Party to retain majority stake during the whole lifetime of the Project (51%-100%) Turkish Party hasn t intended to finance equity of the Project Company Turkey TETAS, Turkish utility Site Project support guarantees PPA Project Company Obtaining of all necessary licenses and permits Project management Funding engagement Contracting Decommissioning & waste management EPC contract EPC-contractor Atomstroyexport O&M contract NPP Operator Rosenergoatom Fuel Supply contract Nuclear Fuel Supplier TVEL Advisory Service (Legal and Financial) Consulting service (Architect Engineer) Agency agreement Electricity Trading Company INTER RAO UES
Concluding Comments Firm government commitment and support - imminent Pure project finance is still challenging for nuclear: more difficult due to Fukushima accident, foreseeable risk is unnecessary safety measures might increase the cost of NPPs adding to higher premium October 2008 global financial crisis and strict financial industry regulation will impact liquidity and make financing tough for investors, like Basel III, that will force banks to increase the capital reserve and to be vigilant regarding risky projects, like NPPs Governments also urging multilateral financial institutions like World Bank, EBRD, to assist with the financing of NPPs Private financing will be in the form of JV among utilities with robust balance sheets and financial risk management strategy Construction risk is rated no 1 so to gain confidence of investors the industry needs more projects on Schedule and within Budget 33
Thank you for your attention! atoms for peace. 34
no. of construction starts Nuclaer power - construction starts 50 40 30 20 10 0
Nuclear: Traditional Financing Model OECD Arrangements and some features: Scope of export credit ECA funding cost * Crucial funding source for new builds Export credit advantage Constrains on ECA support Financing of up to 85% of the off-shore portion Banking fees Without guarantee commercial banks are cautions of lending Loan Term 18 yrs repayment period Ability to finance ECA premium and IDC ECA support limited by export content Support for local content is 15-30% of the off-shore portion Interest rate:libor/euribor +bank margin (depends on country risk assessment) State involvement brings significant funding capacity Flexible repayment structure: - Straight line or levelised (mortgage style) payment schedule Sovereign debt capacity - Possible postponement of starting payment * The ECA funding cost levels depend on country category for some countries that fall in high risk category fees can be very high, as risk premium is added.